C Corporation vs S Corporation: What's the Difference?

There are many types of companies, although C and S corporations are very closely related. Here's a look at the differences to help you decide which is best for your business.

When you plan to start a new business or change the structure of an existing business, you'll find there are many types of companies to choose from. Two of the most common are S corporations and C corporations, both of which share a number of advantages like limited liability protection.

Here's a look at the main differences and similarities between these two corporations to help you decide which is best for your business before you begin incorporation.

Similarities Between S Corporations and C Corporations

A C corporation is basically a standard corporation, while a S corporation has a special tax status, getting its name from Subchapter S of the Internal Revenue Code. S corporations are typically smaller businesses. Despite this difference, these two types of companies share a number of things in common.

Separate entity. Both corporations are considered a legal separate entity after filing for incorporation.

Liability protection. Both corporations offer limited liability protection so owners in the company will not be personally responsible for the debts and obligations of the business.

Documents. Both S corporations and C corporations are required to file formation documents with their state of choice. The Articles of Incorporation are also identical for both corporations. Both companies also gain the same advantages of incorporating in Delaware, which you can learn more about by clicking here.

Management structure. Both corporations have a directors, officers and shareholders who hold ownership in the company and elect the board of directors. The directors are responsible for overseeing decisions and corporate affairs while the officers manage day-to-day operations of the business.

Formalities. Finally, both S corporations and C corporations must abide by the same formalities like issuing stock, holding director meetings, filing reports and paying any fees.

Taxation Differences

The way these two corporations are taxed is one of the major differences between the two. This is also the reason most small businesses choose to incorporate a business in the US as an S corporation.

A C corporation is taxed as a separate entity and must file corporate tax returns, paying all taxes at the corporate level. Most are also subject to double taxation when the income is distributed among owners as dividends. Income will first be taxed at the corporate level and then again as personal income in the form of dividends.

S corporations, on the other hand, are considered pass-through entities and file informational federal returns instead. There is no income tax paid on the corporate level; instead, profits and losses are passed to owners on their personal tax returns, so all tax is paid on the individual level.

Ownership Differences

There are also major ownership differences between these two types of companies. A C corp has absolutely no restrictions on ownership, whereas a S corp has many restrictions in place. There cannot be more than 100 different shareholders and all must be legal residents or citizens of the United States. An S corporation cannot be owned by another S corporation, a C corporation, a limited liability corporation (LLC), a partnership or most trusts. They are restricted to a single kind of stock, whereas most C corporations have multiple stock classes for improved flexibility.

No matter which type of company you choose when you incorporate, make sure you seek the advice of a corporate service company like USA Corporate Services to help you make the right decision and meet all compliance requirements. You can also learn more about the advantages and disadvantages of other types of companies, including LLCs. Incorporating a business requires a great deal of thought as well as informed decision to select the option with the most advantages for you and your business.